Asia Global Dialogue 2012 - Panel Discussion on Sustainable Growth in Asia: Making Markets work for the Millions

Hong Kong31 may 2012

[AS PREPARED FOR DELIVERY]

Distinguished Panellists,

Ladies and Gentlemen,

It is a great pleasure for me to be here, and to participate in this discussion on the challenges of sustainable development, aptly called "making markets work for the millions".

Markets are an efficient mechanism for coordinating the marginal decisions of myriad dispersed firms and households. As recognized by Alfred Marshall, the founder of neo-classical economics, markets work best when, "like nature", they do not have to "make jumps". However, when social systems do have to make leaps, markets, by themselves, are unlikely to provide policymakers with the required support or direction.

In UNCTAD we have always argued that development is a process involving large structural transformations and discontinuities where the market mechanism has to be complemented or supplemented by determined state action. But, as recently demonstrated by the global financial crisis, even in countries at a high level of development, unregulated markets do not necessarily generate socially beneficial outcomes. Similarly, in addressing climate change, markets alone are unable, in the face of environmental externalities, to provide the desired coordination framework to make the shift towards a low carbon future.

Thus, the challenge is to design appropriate regulations that remedy these shortcomings, reining in the market's worst failures, while harnessing its power for a greater number of people. I would suggest that the challenges of lifting people out of poverty through inclusive development, putting finance back in the bottle and making the leap to a low carbon future are all very closely interconnected.

The first, and undoubtedly most significant, challenge is to design an overarching framework for combating climate change. One that does not interfere with the legitimate development ambitions of millions of poor people, and that takes into account the principle of "common but differentiated responsibility" in sharing the burden of adjusting to a low carbon future. This must reflect the fact that advanced economies have since 1950 accounted for about three quarters of the increase in greenhouse gas emissions despite representing less than 15 per cent of the world's population.

In developing countries, however, the challenge of climate change is combined with that of ensuring adequate and inclusive economic growth, not only to eradicate poverty, but to narrow the income gap with rich countries. As a result, in both the developed and developing worlds, the aim is to find ways of achieving low carbon, high growth paths.

There are no quick technological or technocratic fixes. Rather it will be a transformative process that will call as much on the principles of "political economy" as the formulas of textbooks or laboratories.

A key element of such a framework must be a change in the way in which we produce and use energy. Globally, more than 30 million tons of oil equivalent are consumed in the form of primary energy every day, equivalent to 55 kilowatt hours per person per day, with rich countries on average consuming more than twice that figure. For many developing countries, the figure is well under 20 kilowatt hours, China is still well below the global average and most emerging markets consume less than a third of the amount in many advanced economies. Meanwhile, demand for energy is projected to increase significantly. Today, between 1.6 and 2 billion people still have no access to energy services at affordable prices. Thus, the global climate change framework has to reduce the carbon-intensity of energy, while also ensuring wider access.

The United Nations General Assembly has declared 2012 as the "International year of sustainable energy for all". The initiative aims to ensure universal access to energy by the year 2030, while at the same time increasing energy efficiency and the use of renewables. Energy security and low emissions are the main components of a green economy, which has been identified by governments as one of the anchoring themes of Rio+20.

Achieving such goals will require a variety of measures, including regulations, in the form of taxes, emissions-trading schemes, incentives and large-scale investment in renewable energies and R&D. At the heart of this agenda will be finance, with major investments in energy services needed across the developing world. As initial costs and risks are likely to deter private investors, the public sector would be expected to take a leading role, at least in the early stages. Current investments in the global energy system are estimated at some $500 billion per year. Making meaningful progress would require at least twice this during coming decades, -- about $1 trillion a year or $20 trillion by 2030.

In this context, I would like to mention another regulatory challenge. In my report to the recent UNCTAD XIII Conference, I argued that the rise of deregulated global finance has not only led to increased instability and crises, but also short-term, risk-seeking behaviour by financial institutions and markets which has damaged long-term productive investment. If we are to ensure that private capital markets can support investment needs, such as those mentioned above, we must implement reforms to get financial markets back into the business of securing people's savings and mobilizing resources for productive investment. At the international level, reforms are needed to replace unruly and pro-cyclical capital flows with predictable long-term development finance. Unfortunately, to date the process of reform has been slow, with a lack bold leadership and vision.

Nicolas and I had the opportunity to serve on a UN High Advisory Group on Energy and Climate Change. The Group stressed the need to mobilize resources and promote access to technology. While this was an important step forward, we should be thinking in bolder terms. What is needed is a "green new deal" that includes alternative investment strategies. This will require moving beyond the promise of additional resources for developing countries to a full-blown strategy for generating the level of investment needed if developing countries are to meet their side of any climate bargain without undermining other development goals.

In our interdependent world, meeting those goals requires a supportive multilateral trading system. There are growing concerns among developing countries that global trade rules could conflict with measures to promote an inclusive green economy that supports their development goals. There are several possible ways to manage any such tensions. One would be to let existing the WTO dispute settlement system decide. This might be the path of least resistance, but it is uncertain and, in any event, begs the question of whether appropriate rules -- the centrepiece of the multilateral trade system -- are in place.

Objective research and analysis on the economic and environmental effectiveness of trade-related measures, such as subsidies or domestic content requirements, is essential to help in determining how best to make them compatible with international trade rules. In this context, one of the proposals that UNCTAD will make at the Rio+20 Summit is the establishment of a Forum on Green Economy and Trade. We see this as a "safe place", away from formal negotiations and dispute settlement, where countries could discuss their differences and experts could deal with contentious trade measures on a case-by-case basis, without going into the legality of the measures and focusing primarily on their adverse trade impact. This would allow diverse perspectives to be heard, especially in instances where scientific or economic consensus is split along national lines.

Ladies and Gentlemen,

Even if the magnitude is a matter of debate, it is clear that climate change is the most significant collective challenge facing mankind in the next few decades. Addressing it in a way that does not compromise our shared prosperity will require a significant transformation of the world economy. Markets will not bring about this transformation without active policies to guide them. We must now set the foundations for these policies.